Here is a
convenient A to Z reference guide to all
the terms you are likely to encounter in
the mortgage process.
Adjustable Rate Mortgage (ARM)
An adjustable rate mortgage is a mortgage
that can vary (up or down) over the life
of the loan in relationship to changes in
an index such as bank prime. (ARMs are sometimes
called variable rate mortgages). Typically,
the initial mortgage interest rate on ARMs
are lower than those for fixed rate mortgages;
however, over time, since rates on ARMs
can vary over the life of the mortgage,
a fixed rate loan may eventually have a
lower interest rate. Your mortgage professional
can provide you with details regarding the
mortgage programs that are available.
Administration Fee
A fee charged by the broker or lender to
initiate a proposal for a mortgage.
Amortization
Mortgage loans are amortized when they are
repaid in equal payments consisting of principal
and interest. Over time, as the mortgage
is repaid, the outstanding portion of the
debt is reduced and the equity increases.
In the early years of the mortgage, the
largest portion of the mortgage payment
pays the interest on the loan and the smallest
portion pays back the loan principal; in
the later years of the loan, the reverse
is true.
Annual Cost Of Borrowing
The interest, and all loan arranging costs
including appraisal fees, legal fees, title
insurance and other fees as they may apply
to the loan arranged, when expressed as
a percentage of the amount loaned.
Appraisal
The process of determining the value of
the property, usually for lending purposes.
Blended Payments
Equal payments consisting of both a principal
and interest component, paid each month
during the term of the mortgage. The principal
portion increases with each payment, while
the interest portion decreases, but the
total monthly payment does not change.
Bonus
These are charges the borrower pays to the
lender and each point is equal to 1% of
the mortgage amount. Bonuses are charged
to increase the yield on the mortgage.
Cap (Rate Cap, Capped Rate)
A cap refers to the limit on how much an
interest rate can change at an adjustment
period, or over the life of the loan. Often
a builder will arrange with a lender or
mortgage broker for a capped rate program
in order to offer consumers an interest
rate worry free mortgage commitment when
they purchase a new home. This can be particularly
attractive to a new home buyer because of
the time lag between the purchase and completion
of construction where upon the purchaser
can actually close and move in.
Closing Costs
Closing costs include all of the fees, such
as lawyers fees, appraisal fees, inspections,
insurance, title search, taxes, sales tax,
GST, legal disbursements, etc. that a borrower
is required to pay to obtain a mortgage
and close a purchase or refinance.
Certificate Of Location
A document specifying the exact location
of the property and describing the type
and size of the house including additions.
Certificate of Search
A document verifying the transactions registered
against the property - e.g. sales, mortgages,
etc.
Conditional Offer
An Offer to Purchase subject to conditions.
These conditions could be the arranging
of a mortgage, or the selling of an existing
home. Usually a time limit in which the
specified conditions must be satisfied is
stipulated.
Debt-Service Ratio
The percentage of the borrower's gross income
that will be used for monthly payments of
principal, interest, taxes, heating costs
and condominium fees.
Deed (Certificate of Ownership)
The final document prepared by the lawyer
or notary to be signed by the seller transferring
ownership of the home to the purchaser.
This document is then registered against
the title to the property as evidence of
buyer's ownership.
Deposit
A sum of money deposited in trust by the
buyer on making an offer to be held by the
seller's agent, broker, lawyer or notary
until the closing of the sale.
Down Payment
The down payment is a percentage of the
agreed upon selling price that the buyer
is required to pay in cash and may not be
borrowed from the lender. The down payment,
when added to the mortgage, equals the purchase
price of the residence.
Equity
The value of a residence minus the unpaid
portion of the mortgage and less any other
outstanding amounts (such as a second mortgage,
a lien, etc).
Escrow Deposit
If your lender is scheduled to pay property
taxes, insurance, etc. on your behalf, the
borrower must place funds in an escrow account
to pay the required amounts. Typically,
the borrower places funds in this account
as part of the monthly mortgage payment
Fixed Rate Mortgage
A mortgage that has a fixed interest rate
for a specified period of time, usually
1 to 10 years.
Fire Insurance
Before a mortgage transaction can be closed,
the mortgagor must have fire insurance arranged
and in effect. A certificate from the insurance
company may be required at the closing.
Holdback
An amount of money withheld by the lender
during the progress of construction of a
house to ensure that construction is satisfactory
at every stage. The amount of holdback is
generally equivalent to the estimated cost
to complete construction plus any money
required by law such as the 10% holdback
in accordance with the construction liens
act in Ontario, Canada.
House Inspection
The examination of the house by an expert
(qualified home inspector) selected by the
buyer.
Lender
An individual or company that lends money
for mortgages.
Lien
A claim placed on property to satisfy an
unpaid debt (such as a construction lien).
Loan Commitment
A letter issued by the lender; the lender
agrees to make the loan to the borrower
and sets forth the terms upon which the
loan will be granted.
Loan-To-Value
The ratio of the mortgage divided by the
appraised value of the home; lenders use
this ratio to help determine the maximum
amount of a mortgage loan that will be granted.
Mortgage
A lien placed on a real estate to secure
repayment of money borrowed .
Mortgage Insurance Premium
A premium which is added to the mortgage
and paid by the borrower over the life of
the mortgage. The mortgage insurance insures
the lender against loss in case of default
on the part of the borrower. Mortgage Insurance
is provided to the lender by CMHC or GE.
Mortgage Life Insurance
A form of reducing term insurance recommended
for all mortgagors. In the event of the
death of the owner or one of the owners,
the insurance pays the balance owing on
the mortgage. The intent is to protect survivors
from losing their home.
Mortgagor
Legal name for the borrower
Mortgagee
Legal name for the lender
Mortgage Renewal
A mortgage loan where the interest rate
is established for a specific term. At the
end of this term, the mortgage is said to
“roll-over” and the borrower
and lender may agree to extend the loan.
If satisfactory terms cannot be agreed upon,
the lender is entitled to be repaid in full.
In this case, the borrower may seek alternative
financing.
Open Mortgage
A mortgage which can be prepaid at anytime,
without penalty.
Option Agreement
A document stipulating that, in exchange
for the payment of a deposit, a specific
individual is to be given first chance buy
a property within a specified period of
time. If the option-holder does not buy
within the specified period of time, he
loses his deposit.
PITI
Acronym used to represent principal, interest,
taxes and insurance. The combination of
these items is used by lenders to determine
the borrowers projected housing costs.
Prepayment Option
The right to prepay specified amounts of
the principal balance. Prepayment charges
may be incurred on prepayment options.
Repayment Charge
A sum of money paid to the lender by the
borrower for the privilege of prepaying
a mortgage in part or in full.
Second Mortgage
This is usually at a higher interest rate
and represents the difference between the
appraised value of the house and first mortgage
financing plus the downpayment or equity.
May be obtained from banks and finance companies
or through lawyers or notaries. Second mortgages
are available up to 90% of value for residential
property and less for investment or ICI
property. In addition there are various
lenders who offer second mortgages so different
rules and requirements will apply in different
circumstances. You can rely on your mortgage
consultant for advice regarding a second
mortgage.
Term
The length of time during which
the agreement exists. A mortgage may be
amortized over a long period (such as 25
years) with a shorter term (six months to
five years or more). After the term expires,
the balance of the principal then owing
on the mortgage can be repaid or a new term
can be entered into at the then current
interest rates by renewing the mortgage
or refinancing.
Title
When the ownership of a residence is transferred
from the seller to the buyer via a document
called a deed. The persons or company named
on the deed hold "title" to the
property.
Title Insurance
Protects lenders and borrowers against financial
loss which may result from legal defects
in the Title, or other claims against the
Title.
Vendor Financing (Balance of Sale)
The vendor sometimes takes back a mortgage
in order to facilitate a sale.
Zoning Laws
Municipal laws restricting or designating
the use of land for specific purposes.
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